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Advertising is a necessity for any business, and figuring out how much it will actually cost can be a nebulous process. While it is possible to have advertising as a fixed cost, this does not give a company's decision makers much wiggle room in terms of deciding which advertising avenues they will pursue.

Set Advertising Budget

Smaller companies typically have a set advertising budget. It is usually determined by how much the company can spend on advertising throughout that calendar year. This budget is then spread out across various advertising formats. While this type of advertising budget does not allow for a lot of growth, it is easier for many company owners who have lower available resources. If managed properly, a set advertising budget can be effective.

Percentage of Sales

Another way that companies can determine their ad spending is to take the sales they had for the previous year and then allocate a specific percentage of that number towards advertising. This method can also be done by forecasting sales for the upcoming year and using a percentage of that number. The percentage can vary but is typically at least 10 percent of the sales amount. Once this figure is determined, the rest of the process operates much like a set advertising budget.

Competitor Based Costing

This is a variable way to determine the overall cost of advertising and is typically used only by very large companies or companies with more money to spend on their advertising campaigns. This method relies on looking at how much your competitors are spending and the advertising avenues they are pursuing, and matching what they do. Depending on the industry, costs can mount quickly. On the upside, staying competitive typically results in increased revenue for companies, so it is often worth the added expense.

Ad Spend by Outcome

This method of determining an ad spend is based solely on the outcome of the advertising. Pay per click advertising is an excellent example of ad spend by outcome. Advertisers pay only when a consumer actually clicks through an ad. If numerous people click, more money is spent, but generally this also means that more people are purchasing the product or service. Other forms of this type of ad spend include affiliate sales and results-based marketing. This type of budget can be adopted by smaller companies that typically could not afford to spend a lot on advertising, but because they are getting results, they have more money to allocate back into advertising.

About the Author

Kate McFarlin is a licensed insurance agent with extensive experience in covering topics related to marketing, small business, personal finance and home improvement. She began her career as a Web designer and also specializes in audio/video mixing and design.